Our Aussie dollar moves up and down against the US dollar, euro, pound and yen daily – but what does it all mean and how does it affect everyday Australians? Here is a simple explanation of the impact of different exchange rates.
Imagine you wanted to buy a product online for US$100. You have Australian dollars, so in effect you actually make two purchases – firstly, you buy US$ and then you buy the product.
If the exchange rate of the Australian dollar is, say $1.03, you would pay less Aussie dollars to buy the US dollars so the product would cost only $97 (US$100/$1.03).
However, if our dollar was trading at 75 cents to the US dollar, you would have to spend $133.33 (US$100/$0.75) to buy the US currency before buying the product.
Put simply, to convert overseas currencies to Australian dollars, always divide the other currency by our exchange rate.
Therefore a higher exchange rate means goods bought overseas cost us less. This is positive for consumers but it puts pressure on local industries that have to compete with cheaper imported goods.
There’s always another side
In recent years, we have seen the dollar move downwards from its highest value of $1.1055 against the US currency in July 2011. This works better for exporters – they like it when the exchange rate is lower.
Let’s imagine you make widgets and sell them to customers in America for US$1,000 each. You want to deposit the proceeds from the sale of each widget into your Australian bank account. If the exchange rate was $1.03, you would receive only $970 per widget. If the exchange rate dropped to 65c, you would end up getting around $1,538 per widget. A much better outcome!
Now you see why farmers and miners who sell their products overseas love it when exchange rates fall.
In a global economy there are many forces impacting on exchange rates and, try as they might, nobody can control the ups and downs. The movements and the impacts are something governments, consumers and industries have to live with.
Nothing is this simple in practice, though in general terms there are always winners and losers whatever the Aussie dollar is worth.
We hope we’ve made this much easier to understand.
Note: transaction fees and other bank charges have not been included in the above examples